Jupiter US Smaller cuts fees

11

2017

October

Jupiter US Smaller cuts fees – Jupiter US Smaller Companies has agreed to remove its existing performance fee arrangements. The base fee has also been reduced, with effect from 1 October 2017, from 0.80% of total assets per annum to a tiered fee amounting to 0.75% of adjusted net assets up to GBP150 million, reducing to 0.65% for adjusted net assets over GBP150 million and up to GBP250 million, and reducing further to 0.55% for adjusted net assets in excess of GBP250 million.

The fund lagged its benchmark by more than 10% over the year to the end of June 2017. The NAV increased by 15.7% which compares to a rise of 26.5% for the benchmark, the sterling adjusted Russell 2000 Index. The chairman describes this as disappointing but says “the company takes a risk averse approach to investment and aims to achieve long term capital growth with capital preservation. This approach was successful in preserving capital during the bear market of 2008 and adding value in the early years of the economic recovery (2009-12).

To achieve this the company avoids areas of the stock market that are high risk, such as technology and biotech, as well as shares that we believe to be expensive. As a result of taking this approach, asset value growth failed to match the growth in the index. In the year under review, the Russell 2000 Technology sector rose 41% in sterling terms, an exceptional performance which contributed to the substantial increase in the Russell 2000 index.

After a long year of low interest rates and a bond bull market that has pushed bond yields to unprecedented low levels, many growth stocks and so-called “bond surrogates” (stocks that move up and down with bonds, such as utilities and real estate) are now trading at what we believe to be unsustainable levels. Many US retail investors now use sector-specific Exchange Traded Funds to implement trend-following investment strategies and this kind of investing has exaggerated recent market moves.

In the second half of the year, the market became disenchanted with the pace of the new US President’s reflationary agenda and investors rotated into high risk stocks that appeared to offer visible growth, with the result that value stocks (those which are cheaper than average) underperformed in the last six months of the financial year. This meant that although the company’s NAV per share underperformed the benchmark by 5% in the second half of the year, it matched the performance of the Russell 2000 Value Index.”

Robert Siddles, the manager, says that the best contributions to performance came from healthcare service stocks that help reduce healthcare costs. Tivity Health (previously Healthways, a provider of exercise programs for elderly members of health plans) more than tripled as the company returned to profitable growth following a change of management and a restructuring. Addus Homecare, a provider of home social services to frail individuals who are at risk of hospitalization, more than doubled as profits improved when new management addressed cost pressures and resumed acquisitions. Big 5 Sporting Goods, acquired as a recovery stock, doubled as a competitor’s liquidation sale ended. Ollie’s Bargain Outlet Holdings reported better than expected same store sales as Amazon’s continuing growth led to more retail bankruptcies and therefore greater availability of stock for Ollie’s. KLX benefited from recovery in its energy service subsidiary. The positions in both KLX and Big 5 were sold.

Poor contributions to performance came primarily from technology stocks and two in particular owing to management failings. The Rubicon Project suffered badly when the company missed the market move last year to header bidding (a means of increasing the prices realised by publishers) and the shares fell 62%. The position was retained because cash per share is approximately 75% of the share price and the company’s own header bidding product is now growing quickly. Synchronoss Technologies halved following the acquisition of a provider of outsourced cloud storage services for commercial customers and the appointment of the acquired company’s CEO to run the combined company. The new management team was fired and the company announced a profit warning followed by a revenue restatement. The position was sold when an offer made to take the company private led to a bounce.

Amplify Snack Brands lost about a third in value after profit disappointments. Management appeared to lose focus on the core business following the acquisition of UK-based Tyrrells Potato Crisps. There were problems at Tyrrells but management appear to have taken decisive action and the stock is beginning to recover. The position was increased on weakness. Mednax lost 16% as profit growth slowed following a decline in births, fewer acquisitions and problems with an acquisition in “distance radiology”. There are signs of improvement in radiology and the shares seem too cheap given the continued good revenue growth. Civitas Solutions fell 12% following disappointing third quarter results. They held on because the company is managing costs well and, as the only provider of scale, has good prospects to grow by acquisition.

There was only one bid this year, by United Bankshares for its Virginia- based neighbour Cardinal Financial.

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